On 8 December 2023, the High Court refused a call on a performance guarantee because of fraud. This is one of the few decisions in South Africa that has granted an interdict based on the fraud exception.

LnP Beyond Legal is incredibly proud to have secured this result for its client – a foreign contractor that has invested millions in South Africa’s energy market. This outcome brings much needed certainty for the Contractor and is a landmark decision in South Africa. 

The Contractor, a consortium, constructed a 25 MW biomass energy plant at Ngodwana Mill. The Facility went into commercial operation in March 2022, and the Employer is selling electricity to Eskom, bringing much needed power onto the national grid. 

After the Facility went into commercial operation, the Employer made a demand for payment of delay liquidated damages (DLDs) for the sum of approximately R164 Million (the Amount) and threatened to call up the performance guarantee. The Contractor refused the demand because, by agreement, the DLDs were set-off from amounts due and payable to the Contractor. The Employer, through its Facility Agent (a well-known bank in South Africa that often acts as a Facility Agent on renewable energy projects), subsequently made a call on the performance guarantee. 

The Contractor launched an interdict to stop this. The Contractor argued that the demand on the guarantee was fraudulent because both the Employer and the Facility Agent knew that the Contractor did not owe the Amount to the Employer. 

To provide some context, below is a brief chronology of events:

• During 2021, the project was delayed. 
• From 19 January 2021 to 13 July 2021, the Employer issued tax invoices in which it levied the maximum amount of DLDs for which the Contractor could be liable, viz R192 386 797.85.
• In March 2021, discussions were held between the Contractor and the Employer, which led to the parties agreeing that the DLDs would be set off against monies owed by the Employer to the Contractor.
• On 10 May 2021, the Employer addressed a letter to the Contractor in which it confirmed the DLDs discharge agreement and that the discharge of the DLDs had commenced with the March 2021 invoices.
• In December 2021, the parties agreed that the outstanding DLD amount was R28 222 982.35. The Employer’s financial manager confirmed this amount.
• On 18 December 2021, the Contractor confirmed their maximum liability for DLDs was R192,386,797.85. They also noted that R164,163,815.10 had been paid through set-off. The Contractor then requested the Employer’s confirmation and acknowledgement that the outstanding DLDs amount was R28,222,982.35.
• On 20 December 2021, the Employer signed the Contractor’s letter, affirming their agreement with its contents. This confirmed that R164,163,815.10 had been paid by the Contractor for the DLDs, leaving a remaining balance of R28,222,982.35.
• Having received the signed confirmation from the Employer, the Contractor duly paid the outstanding balance on 20 December 2021.

Accordingly, the Contractor’s case was that it paid the Amount partly in cash and partly through set-off, in December 2021. The Employer denied this set-off or withholding and said that although its Annual Financial Statements as at 28 February 2022 recorded the Contractor’s version (at 3 different places), this was merely an accounting entry based on incorrect facts. 

With regard to the chronology of events, the Court found that:

• An agreement was reached in which the DLDs were being paid by “moneys which are or may be payable to the Contractor”.
• The evidence shows a prima facie case that the demand on the performance guarantee for payment of the DLDs was fraudulent.
• The Employer knew that it had manipulated things to secure an entitlement to trigger payment in terms of the performance guarantee. 

The above evidence was indicative that the Employer was acting fraudulently.

The Court emphasised that the parties could agree amongst themselves that the debt was discharged calling it whatever they liked, be it ‘set-off’ or ‘discharge of debt’. The judgment notes that the inquiry into the legal construct of ‘set-off’ was largely irrelevant. The Parties agreed on a mechanism for the settlement of the debt, and they implemented that agreement. 

The Court further confirmed our law on the fraud exception – when a demand is made, but the person making the demand knows that the money is not due, such demand is made fraudulently. The evidence put forward by the Contractor showed that the Employer’s demand for payment was fraudulent. 

This judgment recognises that the basis of the demand is material to the issues in this application, as fraud is fundamentally a factual matter. Without an understanding of why the demand was made, the question of whether the demand was fraudulent could not be entertained.

The Bank was the agent of the Employer because it was defined as the Facility Agent in the guarantee. This is common practice in project finance transactions. The guarantee required the Employer to authorise the Bank to make the demand and for the guarantor to pay those monies to an account of the Employer. 

The Bank did not participate in the hearing. It elected to abide by the decision of the Court. According to the Court, it was clear that the Bank accepted that it was an agent acting with imputed knowledge of its principal, in this case, the Employer. This is a strong warning to Banks that accept this position – as it will be deemed to have imputed knowledge of the Employer’s conduct – including knowledge of the fraud.  A full copy of the judgment can be found on LnP Beyond Legal’s Website: https://lnpbeyondlegal.com/wp-content/uploads/2024/03/20231208_Judgment.pdf

For more insight on navigating the judgment or bond calls in the South African market, contact your construction and engineering law experts:

• Nikita Lalla | Nikita.Lalla@lnpbeyondlegal.com 
• Ricardo Pillay | Ricardo.Pillay@lnpbeyondlegal.com
• Aneshree Padayatchi | Aneshree.Padayatchi@lnpbeyondlegal.com